Marginal business logic

The link between pharma major Wockhardt, Akbarally���s , one of the country���s earliest departmental stores and Monginis, a chain of bakeries, may not be obvious immediately . A quick background check establishes the common factor ��� they all are a part of the Khorakiwala family. Fakhruddin Khorakiwala, 90, who was a former sheriff of Mumbai, inherited Akbarally���s in the early 40s when it was still a pharmacy, and inspired by American pharma company Parke Davis, he decided he needed to backward integrate his business from retail to manufacturing .

As a result, he acquired Worli Chemical Works (which was later renamed Wockhardt) and eventually, in 1957, he expanded the pharmacy into a departmental store; acquiring the Monginis bakery at the same time. ���There was an economic consideration to these decisions The business environment was very different then,��� says Khorakiwala who continues to remain actively involved with Akbarally���s . ���There was an opportunity to do something new with the businesses which catered primarily to the British.���

Every corporate with a history, it seems, has an offbeat ���other��� business that���s far removed from it���s core operation. DCM Shriram Industries, for example , has long been in the business of making country liquor, while the Thapars are major exporters of gherkins. Tata Power makes fine bone china on the side, Vijay Mallya���s UB group also makes fertilisers, while fertiliser major GNFC is into IT.

The Mahindra group has always been famous for it���s hidden jewels ��� companies tucked away behind its larger automotive operations that come into the limelight only when they���re ready. Today , Anand Mahindra counts among his hidden jewels a defence systems project for making torpedoes and a five year old grape export operation, which is now one of India���s biggest. ���We���ve exported over 500 containers of Mahindra branded grapes,��� he says. ���We may not be famous for it yet, but it���s not secret either.���

The Mahindras also have a hugely profitable steel trading operation that was started by Anand Mahindra���s grandfather after the world war. JC Mahindra spent much of his early career with Tata Steel, after which the government appointed him as the controller of iron and steel. Using the contacts he made, JC Mahindra later started a steel trading business, today known as Mahindra Intratrade. Grandson Anand realised the global reach of this line of business when he was at Harvard and a fellow student, from Mitsubishi Corporation, Japan, invited him and his wife Anuradha out to dinner.

���We were so glad to be taken out for a free meal that I didn���t even ask the reason for the invitation,��� recalls Mahindra. ���It later turned out that our new friend had read the Mahindra name in the Mitsubishi manual. We were one of Mitsubishi���s first partners in the steel trading business.���

It is not unusual, especially with business groups that were coming of age in the post-independence era, to have a slew of subsidiaries which may have nothing to do with the core business. Jayesh Desai, national director - transaction advisory services, Ernst & Young, says that a majority of these subsidiaries which are present in unrelated sectors were set up a long time ago, and their legacy continues till today: ���Most of these businesses would have been established at a time when having a license was of more value than the actual value one could create out of the business.���

Clued-in folks may know that the Singhanias of Raymond make the KamaSutra brand of condoms, but few would be aware that the company also makes steel files. Harshal Jayavant , president-engineering business, Raymond, says that when the company was set up in 1949, it was only one of two organised local Indian companies in the segment, with a large portion of the country���s requirement being imported. ���Today, JK Files is leading the consolidation that is happening globally in this industry, with a market share of over 30 %��� he says.

But instances like this are more an exception than the norm. If it���s not a conglomerate, then the business generally remains a marginal one, where the possibility of continued investment is always uncertain. ���In most cases, if it is not a related business, it does not have the ability to make a success on its own,��� says Desai. In some cases, private equity funds have stepped in , and often, managed to make a success of it. A few years ago, cement-maker ACC sold its refractory business to ICICI Ventures. Around the same time, Ranbaxy divested its fine chemicals unit.

The logic is simple: if an enterprise is a marginal part of the group���s business, it will receive marginal resources and attention, whereas a venture fund would be fully focused on making a success of it. But this does not always happen as these businesses were initially set up based on emotion or non-business reasons, and not pure business logic, and as long as it is a cash generator, organisations would not really think of selling it.

Of course, not all companies are looking at cashing out. Wipro���s earnings from its consumer goods business may be a fraction of what the IT division brings in, but Azim Premji has made it clear that he would not let go of the business which the company started out with. While Wipro Consumer Care and Lighting may have been sidelined for a few years while Premji focused on the IT services division, the attention is now back on the consumer business. The FMCG company announced the acquisition of Singapore-based Unza Holdings, earlier last year, giving it an international presence as well as a larger brand portfolio, along with signalling that the company was not for sale, as has been often speculated.

Of course not all companies that were set up in the early days of the Indian economy have remained on the sidelines. Atul, the chemicals arm of the Lalbhai Group, has a wide product portfolio, with interests ranging from polymers to fragrance chemicals. Sunil Lalbhai, MD, Atul, says, ���The companies under the umbrella of Lalbhai Group operate in varied businesses such as textiles, engineering and chemicals. These businesses naturally call for different and distinct vision and strategy though wshenever required we discuss particularly major initiatives.���

The older, textile business, Arvind Mills, meanwhile has also expanded into being a ���farm to fashion��� retailer, with rights to international brands like Nautica, Kipling, GANT and Polo in the country. Sanjay Lalbhai, CMD, Arvind Mills, adds that all the group companies, including others like Amol Dictalite and Anup Engineering are held together by a loose arrangement and that there is no governing body which regulates the companies.

In many instances, the newer businesses could be a small venture which is tagged on to an existing business, to simply avoid the hassle of setting up a new company. Till a few years ago, Tata Power also housed Tata Broadband, a company under which the group had first entered the broadband internet services market . Set up in 2001, Tata Broadband was primarily meant to provide services to other service providers like data centres, cable operators and cellular service providers among others.

In 2005, this company was sold to group company VSNL (now Tata Communications), which was a more a p p r o p r i a t e home for the company. Tata Power though, still houses Tata Ceramics, a small, largely export oriented unit, which makes crockery for brands like Wedgewood and Royal Doulton. The fine bone china from Tata Ceramics even makes it to the dining table at Rashtrapati Bhavan. The Tata Group has recently started retailing the Tata Ceramics brand through its Westside retail chain. Whether it grows big enough to finally be demerged like Tata Broadband remains to be seen.

Insiders point out that often there is some amount of step-motherly treatment when it comes to the attitude of the board members when it comes to the smaller company, but Raymond���s Jayavant has no such complaints. ���Every quarter, the three business divisions ��� apparel, textiles and engineering ��� make detailed presentations to the finance committee, and often, we spent more time on engineering than the others,��� he says. Given that engineering, a niche business, contributes about 15% of the group���s total revenue, he agrees that the textile business would take up more attention , but it doesn���t means that the senior management is not involved in the business unit.

Few diversifications by single business companies are done purely as a strategic business move. Gujarat Narmada Valley Fertilizer Corporation (GNFC) is among the few to enter a new sector on the basis of a carefully planned diversification effort . Jagdeep S Kochar, executive director, GNFC says that the IT division initially started out as a manufacturer of telecom equipment in 1988, when the sector was still at a nascent stage. The spread of globalisation rendered this almost obsolete over time and they realised that to remain competitive it was time for a revamp.

���It was around the same time that the Government of Gujarat was looking for a partner to boost IT in the state. GNFC had the advantage of being partly owned by the Gujarat Government, and was an obvious choice,��� he says. Starting with GNFC Info Tower in Ahmedabad , which was the first IT Park in Gujarat, the unit has expanded to offer other services like digital signatures, e-procurement and remote infrastructure management. ���GNFC invested in the business in the initial years, but we are now an independent unit and give money back to the parent company,��� says Kochar. The company is planning to undertake a large-scale expansion programme later this year, and again, this would involve investments by GNFC.

Another unusual pairing is Mangalore Chemical Fertilizers, which today is a part of the UB Group. From the time UB acquired a 30% stake in the fertiliser company in 1990, it has gone from being a potentially sick company to being a reasonably succesful one. DCM Shriram Industries, not to be confused with DCM Shriram Consolidated has also set up an alcohol unit at its Daurala sugar plant, where it manufactures country liquor, for sale mainly in Uttar Pradesh along with other brands for other states.

Desai says that entering any new business would require full support from the main business, otherwise it is likely to struggle. In recent times, the majority of unrelated diversifications have happened into booming sectors like retail, telecom and real estate. And these are unlikely to remain marginal businesses as the sole reason for the company setting up a new subsidiary would be to cash in on the good times in the sector.

���In India, there will be a lot of diversification as the economy is still maturing and there is a level playing field for entrepreneurs ,��� says Sanjay Lalbhai. Meanwhile, as long as the ���other��� business continues to make money, organisations would naturally be content to hold on. Whether they would cash out when they get a really attractive offer is what remains to be seen.